Dixon Technologies' Q4FY18 results (Outperformer) - Weak performance, focus on backward integration

Q4FY18 standalone result highlights

• Adj PAT +31% yoy to Rs136mn: led by margin expansion.
• Revenues fell 2.4% yoy to Rs6bn: led by sharp fall of 60% yoy in mobiles (mkt share loss of Gionee, a key customer) and 29% yoy fall in reverse logistics (fall in STB business). Revenues were strong in home appliances (washing machine; +92% yoy; scale up of Samsung), lighting (+13% yoy) and consumer electronics (TV; +23% yoy).
• Margins expand 147bp yoy: to 4.6% led by expansion in lighting products (+435bps yoy; positive operating leverage) as also mobiles (+107bps yoy; cost efficiency steps). While margins fell -369bps yoy in home appliances on high base, margins rebounded qoq on stabilisation of plant on sharp ramp up of Samsung. Margins fell in Consumer electronics (-92bps yoy) on extra cost for 2 facilities (Dehradun & Tirupathi) as also reverse logistics (-341bps yoy) led by decline in profitable STB business. Hence, EBITDA +44% yoy to Rs274mn.
• FY18 PAT +27% yoy to Rs609mn led by 15.5%/20.6% revenue & EBITDA growth. EBITDA margin expanded 20bps yoy to 3.9%. Lower interest (-13% yoy; debt repayment) and higher depreciation (+42% yoy; commencement of new facility) restricted PAT.

Conf call highlights: (1)    Consumer electronics OPM to rebound to ~2.5% once Dehradun plant shuts in Jul-18; (2) Backward integration (LCM in TVs, mechanicals in lighting, PCB mfg in mobiles) to drive margin expansion in FY19 (3) PCB mfg for mobile phones to start in Aug-18; (4) Lighting has seen some lag in pass through of higher RM costs; (5) Adding new customers across TV & Mobile segment, while reverse logistics STB business is normalising (6) Interest cost jumped in 4Q due to bill discounting which will sustain;  (7) FY19E guidance: ~25% revenue growth & 40bps margin expansion; (8) FY19E capex to be at Rs650mn

Impact on financials: FY19/FY20 EPS cut by 11-12% to Rs79.3/106.2

Valuations & view

Dixon is well placed to capitalise on growth in domestic EMS industry, spurred by its wide product portfolio and cost leadership. The company’s deep client relationships, flexible manufacturing and design capabilities give it a competitive edge over peers. We expect Dixon’s focus on client addition and backward integration to drive 23% revenue and 40% earnings CAGR over FY18-20E. We expect Dixon’s rich valuations (32x FY20E earnings) to sustain led by its sustainable asset-light business, expected strong growth and superior return ratios. Outperformer.